Measuring retirement security -- or retirement income adequacy -- is an extremely important topic. The May 2012 EBRI Notes article provided updates for the previously published EBRI Retirement Readiness Ratings™ as well as the average Retirement Savings Shortfalls (RSS). This paper provides sensitivity analysis on the Retirement Readiness Ratings™ by giving additional information on the percentage of the at-risk population that is relatively close to having adequate financial resources for retirement income adequacy. It also provides more detailed analysis on the distribution of the RSS. Unlike previous analyses, this paper focuses on the Gen Xer cohort (born between 1965-1974) in an attempt to assess the impact that eligibility for participation in a 401(k) plan has on these values. The dollar value of retirement savings shortfalls for Gen Xers varies considerably with the number of future years of eligibility for 401(k) plans, particularly for those in the highest severity category (simulated to have a shortfall of $200,000 or more): 13 percent of those with no future years of 401(k) eligibility have shortfalls in this range vs. only 3 percent for those with 20 or more years. Future eligibility for 401(k) plans makes a significant difference in reducing the percentage of households with shortfalls of $200,000 or more for all gender/family status combinations, but single females experience the largest absolute reduction in the percentage of those with shortfalls in this range. This paper also provides a comparative analysis of the importance of nursing home and home health care costs on retirement income adequacy. Figures 1-6 in the paper are based on the EBRI Retirement Security Projection Model® (RSPM) which simulates 1,000 alternative retirement paths for each household to explicitly model investment, longevity, and stochastic health care risks (i.e., nursing home and home health care costs). Figure 7 modifies RSPM by completely eliminating the nursing home and home health care risks to illustrate the extent of the errors introduced in models that ignore these risks. The PDF for the above title, published in the June 2012 issue of EBRI Notes, also contains the fulltext of another June 2012 EBRI Notes article abstracted on SSRN: “Use of Health Care Services and Access Issues by Type of Health Plan: Findings from the EBRI/MGA Consumer Engagement in Health Care Survey.”

Using the Japanese Study of Aging and Retirement (JSTAR), a new Japanese panel survey of people age 50 or older, we find that many Japanese in their early 50s - compared with those in their late 50s and early 60s - expect their level of public pension benefits to decline. We find that recent pension reform, which raised the pensionable age, affected people by increasing the age when they expect to claim their benefits by almost the exact same amount for all. The reform decreases their expectations for public pension benefits, although this effect is not necessarily significant. We also find evidence that individuals’ anxiety about the public pension program’s future induces an increase in their private savings.

Are early retiree health benefits (RHBs) a form of deferred compensation that binds workers to an employer? Most employers who offer RHBs offer them only to workers who have 10 or more years of tenure with the firm and have reached age 55. Accordingly, workers in firms offering RHBs have an incentive to stay with a firm in the years before they attain eligibility for RHBs, and a greater incentive than otherwise to retire thereafter. We test for the existence of such a pattern of incentives by examining the age-specific relationship between workers’ eligibility for RHBs and retirement. The findings suggest that workers in RHB-offering firms are less likely to retire at ages 50 and 51 than similar workers in firms that do not offer RHBs. Also, RHB-eligible workers aged 60 and 61 are more likely to retire than similar RHB-ineligible workers. Such a pattern is consistent with RHBs acting as part of a delayed-payment contract of the kind described by Lazear (1979, 1981).

In 1997, Hungary and Poland led Central Europe in partially privatizing their national pension systems, diverting a portion of public pension contributions to privately‐managed individual investment accounts. In the aftermath of the global economic crisis, both governments retrenched these second‐tier schemes: Hungary (December 2010), by ceasing to fund the accounts and recouping most workers' existing balances; and Poland (April 2011), by reducing the diversion of contributions to the second tier. The factors that drove these retrenchments are traced to the original 1997 second‐tier designs, which omitted key specifications related to financing the accounts, private benefit design, and the regulation of private management fees. While both governments tried to compensate for the missing design specifications during implementation, the results were limited. By reducing investment returns and raising borrowing costs, the global economic crisis brought the problems to a head. The conclusion highlights some outstanding issues whose resolution will shape the retrenchments' long‐term impacts.

Thursday, July 19, 2012

The Social Security Disability Insurance (DI) program has expanded rapidly during the past few decades, and CBO projects that, under current law, future spending for the program will significantly exceed the revenues dedicated to it.

In a study prepared at the request of the Ranking Member of the Senate Budget Committee, CBO has examined a variety of potential modifications to the DI program. CBO has also prepared an infographic summarizing the application process for DI, the number of beneficiaries and benefits paid under the program, and policies regarding disabled people in other countries.

Alleviating the financial pressures on the DI program would require a substantial increase in revenues for the program, a substantial decrease in the program’s costs, or some combination of those two approaches. Options to increase revenues are straightforward but limited: DI taxes paid (through the Social Security Payroll tax) by employers or employees must rise, or some other source of funding must be used. In contrast, options for reducing costs are both more complex and more numerous: For example, the components of the formula that is used to calculate DI benefits could be altered, as could one or more of the rules used to help determine eligibility for the program. Alternatively, policymakers might want to increase spending for the program by providing greater amounts of support to certain disabled workers or their dependents. CBO in conjunction with the staff of the Joint Committee on Taxation has estimated the budgetary effects of a variety of such modifications to the DI program.

Policymakers could also alter the program in more fundamental ways. A disability insurance system that emphasized workers’ continuing in their jobs, for example, might lead to a higher rate of employment among those with disabilities than is now the case. In this report, CBO reviewed proposals for several such changes to the DI program and described the main themes among them.

This article analyses the risk of disability facing workers who contribute to the Argentinian Integrated Social Security System (Sistema Integrado Previsional Argentino — SIPA). Using administrative records as our source of data for the period 2000‐2006, the results indicate that 1.46 workers per 1,000 became disabled annually during that period. The risk of disability rates is higher for men than for women, but increased with age for both sexes. The risk of disability rates has also been broken down by pathology and social security scheme, taking the effects of age and sex into account. To conclude, international comparisons are presented.

Pension fund solvency and retirement-income adequacy are high on the agendas of policymakers around the world. People are living longer, retiring early, and facing layoffs in a global economy where technological and social change can be rapid and unsparing in its impact on workers. In developed countries, promoting longer work lives by raising the age of eligibility for pension benefits has featured prominently in policy reform. Raising the retirement age is particularly appealing to policymakers because it can have a substantial impact on pension fund solvency and because its implementation is often legislated well into the future. Nonetheless, survey data for the United States and European countries suggest that a higher retirement age is not popular with workers, even though many express interest in working well into their retirement years. Moreover, not everyone can work longer, and short of draconian increases, raising the retirement age cannot, by itself, solve the pension problems besetting many countries.

Please join us as we examine various facets of pension reform, longer working lives, and fiscal sustainability of public systems in the United States and around the world with distinguished experts. Program Speaker: Christian Toft, University of Kassel, Germany

Upping the Retirement Age: Pension Reform and Labor Supply in the United States and the European Union, 1950-2060

Professor Toft will look at retirement-age policies in the United States and EU15 since 1950 and the impact of those policies on labor force participation at upper ages. He will then discuss recent increases in the statutory pension (or "normal" retirement) age in those countries and how labor force behavior is changing as a result.

Dr. Jackson will highlight the CSIS Global Aging Preparedness Index (http://csis.org/publication/global-aging-preparedness-index), which reviews the adequacy and sustainability of retirement savings systems in 20 key countries, and will provide illustrative examples of other approaches to pension reform, solvency, and old-age income protection. He will also discuss some of the dilemmas policymakers face in implementing reform to entrenched pension systems while providing a decent living standard for the old and not imposing a crushing financial burden on the young.Discussant: Sandy Mackenzie, AARP Public Policy Institute

Dr. Gokhale is recognized internationally as an expert on entitlement reform, labor productivity and compensation, U.S. fiscal policy and the impact of fiscal policy on future generations.

He works with Cato's Project on Social Security Choice to develop reforms for programs such as Social Security and Medicare. Gokhale served in 2002 as a consultant to the U.S. Department of Treasury and in 2003 as a visiting scholar with the American Enterprise Institute (AEI). He was the senior economic adviser to the Federal Reserve Bank of Cleveland from 1990 to 2003.

Dr. Gokhale holds a Ph.D. in economics from Boston University and is currently a member of the Social Security Advisory Board.

Friday, July 13, 2012

Writing for Investment News, Boston University economist Larry Kotlikoff explores the innards of the annual Social Security Trustees Report.

“Now that health care is off the front burner, it's time to fix Social Security. Social Security's trustees say the system needs only “modest changes.” In fact, the system is desperately broke.”

“The proof is buried deep in the trustees' own 2012 report in a complex table, numbered IV.B6. The system's actuaries prepare the report's tables. But what the trustees make of them is up to the trustees. Clearly this year, as in others, the trustees ignored table IV.B6. How else could they have come up with their blase statement that Congress should address Social Security's finances “in a timely way”?”

“Table IV.B6 is a long-run balance sheet for Social Security. It shows that the system's $88.9 trillion in liabilities exceed its $68.4 trillion in assets by $20.5 trillion.”

“A new report says the Social Security Administration failed to properly record the deaths of 1.2 million Americans on a list that is distributed to federal agencies and private companies, making it likely that their families or others wrongly received benefits after they died.”

“The report released this week by the Social Security agency’s inspector general follows several audits that in recent years have found the government paid benefits from farm subsidies to Medicare years after the people designated to receive them died.”

When Does It Pay to Delay Social Security? The Impact of Mortality, Interest Rates, and Program Rules

by John B. Shoven, Sita Nataraj Slavov - #18210 (AG)

Abstract:

Social Security benefits may be commenced at any time between ages 62 and 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit to reflect the age at which benefits are claimed. In earlier work (Shoven and Slavov, 2012), we investigated the actuarial fairness of this adjustment for individuals with average life expectancy for their cohort. We found that for current real interest rates, delaying is actuarially advantageous for a large subset of people, particularly for primary earners in married couples. In this paper, we quantify the degree of actuarial advantage or disadvantage for individuals whose mortality differs from the average. We find that at real interest rates close to zero, most households - even those with mortality rates that are twice the average - benefit from some delay, at least for the primary earner.

At real interest rates closer to their historical average, however, singles with mortality that is substantially greater than average do not benefit from delay; however, primary earners with high mortality can still improve the present value of the household's benefits through delay. We also investigate the extent to which the actuarial advantage of delay has grown since the early 1960s, when the choice of when to claim first became available, and we decompose this growth into three effects: (1) the effect of changes in Social Security's rules, (2) the effect of changes in the real interest rate, and (3) the effect of changes in life expectancy.

Thursday, July 5, 2012

(6) When They're Sixty-Four: Peer Effects and the Timing of Retirement

Kristine M. Brown and Ron A. Laschever

This paper examines the effect of peers on an individual's likelihood of retirement using an administrative dataset of all retirement-eligible Los Angeles teachers for the years 1998-2001. We use two large unexpected pension reforms that differentially impacted financial incentives within and across schools to construct an instrument for others' retirement decisions. Controlling for individual and school characteristics, we find that the retirement of an additional teacher in the previous year at the same school increases a teacher's own likelihood of retirement by 1.5-2 percentage points. We then explore some possible mechanisms through which this effect operates. (JEL H75, I21, J14, J26, J45)

Tracing statutory and regulatory history in veterans law can be exceptionally difficult. Although judicial review has only been available for a little more than two decades, the modern veterans benefits system evolved -- more by happenstance than design -- from the system that was originally adopted to serve WWI veterans. Tracing key statutory and regulatory provisions to their true origin is not easy because much of the legislative and regulatory history for veterans law provisions in the United States Code and the Code of Federal Regulations is simply incorrect. Moreover, even if a provision were traced past the false origins provided to its true enactment, the language was often copied or adapted from an even older authority. This article provides guidance in understanding the true origins of the modern veterans benefits system and traces many key provisions to their antecedents under the Bureau of War Risk Insurance and the Pension Bureau.

We examine the impact of a stylized pay-as-you-go (PAYGO) Social Security program in an economy of overlapping generations with equilibrium growth. We adopt realistic mortality and other demographic assumptions and allow for the presence or absence of full life annuities. In all cases we find that steady state economies with PAYGO Social Security programs grow more slowly than those without. Also, we find that, for steady state economies having the same wage rate at the current time, initial all-inclusive wealth and lifetime expected utility are lower for households newly entering the economy with Social Security, and for all households subsequent. Growth and welfare are lower in economies without annuities, but the quantitative impact depends on how the financial wealth of decedents is distributed across the surviving population. With or without annuities, the presence of a PAYGO Social Security program reduces growth and welfare.

Within this article we discuss herding behavior of pension funds. Observers have suggested that pension funds are 1) more likely to herd than other (institutional) investors and by some scholars that 2) due to its sheer size, herding behavior of pension funds could have a negative effect on economic stability. We investigate the consistency of the recommendations to practitioners. Findings are that much of the prevailing academic controversy can be aligned by taking into account the specific circumstances under which the arguments hold true. More long term research on the response of pension funds to fads and fashions in investment could further clarify cognitive biases in the investment policies of pension funds. Also a contingency perspective is needed in academic literature if we are to make valuable and applicable recommendations.

The Canadian Federal Government has proposed a new private-sector retirement savings scheme to address the widely-recognized under-saving of Canadian employees for retirement. The proposed scheme emphasizes voluntariness in a choice architecture associated with the “nudge” approach to regulation often associated with Cass Sunstein and Richard Thaler. The scheme is critiqued from a public policy perspective and compared to an alternative policy option, expanding a publically-administered occupational retirement savings scheme, the Canada Pension Plan. The author argues that despite evidence that expanding the Canada Pension Plan would be more efficient at achieving policy objectives, the Federal Government has promoted the private-sector scheme instead. The author speculates that reasons for this decision are not strongly rooted in economic or legal arguments, but instead in a political anxiety over mandatory public programs. The author concludes that if experience in other jurisdictions is any indication, the proposed scheme will not meet the stated policy objectives.

A line of recent studies cast doubt on the efficacy of the lifecycle investment strategy, which calls for switching into a more conservative investment portfolio as retirement approaches, as a suitable way to provide for the retirement needs of workers with defined-contribution pensions. After comparing simulation outcomes for lifecycle and fixed asset allocation strategies, we determine that the lifecycle strategy can be justified even in a framework including only financial wealth. We find that investors with very reasonable amounts of risk aversion may prefer the lifecycle approach, despite the tendency for aggressive fixed allocation strategies to produce larger expected wealth.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.